The fuel markets refocus on OPEC again
The Bunker Review is contributed by Marine Bunker Exchange
World fuel indexes stayed steady during the week despite of U.S. President elections, which supposed to become a new short-term driver for fuel prices. The vote results really rattled markets: most polls had shown Clinton ahead of Trump and her odds of winning were at 80 percent or more. However, turbulence calmed rather fast, as newly elected U.S. President Donald Trump promised to try to unite America’s divided political factions.
Meantime, fuel fundamentals are still weak, with U.S. crude stocks surging, demand growth low, and doubts that the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producer Russia can agree on a meaningful output cut this month. It looks like in the near future the market dynamic of softer demand and stronger supply will become a more dominant driver of prices than the impact of OPEC's verbal interventions.
MABUX World Bunker Index (consists of a range of prices for 380 HSFO, 180 HSFO and MGO at the main world hubs) has demonstrated insignificant fluctuations in the period of Nov.03 – Nov.10:
380 HSFO - up from 251.50 to 253.21 USD/MT (+1,71)
180 HSFO - up from 295.00 to 296.79 USD/MT (+1,79)
MGO - down from 487.07 to 471.00 USD/MT (-16,07)
While Trump's victory raised concerns about future economic growth and oil demand, there were some supportive factors for prices such as a potential shift in U.S. policy towards Iran. Before Trump criticized the West's nuclear deal with Iran, an accord that has allowed Tehran to increase crude exports sharply this year.
In the longer term, the reaction in fuel markets to the election result would likely return back to questions over whether OPEC will be able to complete a deal to restrain output at its late-November meeting in Vienna. Concerns about the oil output deal have grown amid disputes among OPEC members about their current production baselines and willingness to freeze or cut production in 2017. The doubts about the process have been intensified after the failure of a technical meeting of a special high-level committee in Vienna on Oct. 28-29. Although in practice, the committee is not empowered to make the political compromises as only ministers have the authority to strike a binding deal on output.
In the meantime, many OPEC countries have continued to raise production. It means that to have a significant impact on the predicted supply-demand balance for 2017, Saudi Arabia and its allies will need to cut their output from current levels by at least 750,000 bpd and pledge to hold that output level for at least 12 months.
While OPEC is officially communicating that it is deeply optimistic that it could reach a deal to stabilize oil prices, two major opponents - Saudi Arabia and Iran - still have contradictions to be settled. Saudi Arabia urged the cartel that it will bring down crude prices by increasing its own oil production should Iran continue to refuse to participate in the cut. As per some sources, Saudi Arabia offered to cut to around 10.2 million bpd from the summer peak output of 10.7 million bpd if Tehran agreed to freeze at 3.6 million-3.7 million bpd. Iran, for its part, reported its production was 3.85 million bpd for September and is still saying it will cap only when it reaches that threshold, which is 4.2 million bpd.
The potential threats to the agreement also come from a resumption in exports from Nigeria and Libya (Libya’s largest oil terminal Es Sider with export capacity 1.5 million barrels may re-open as early as next week), an acceleration in U.S. oil drilling, and a slowdown in the global economy and oil demand. Any of those risk factors could push back fuel market rebalancing by six to 12 months or even more.
In spite of this, OPEC raised its forecast for global oil demand next year and through the end of the decade, anticipating that cheaper crude will spur consumption even as economic growth slows. It sees demand reaching 98.3 million barrels a day, or 900,000 more than the group projected in its previous annual outlook. The group assumes crude will average $40 a barrel in 2016, and it raised its projected price by $5 a barrel in each of the following years through 2020. Brent has averaged about $44 a barrel so far this year.
International oil companies will probably cut investment spending about $370 billion this year and next. The global oil industry has postponed a number of projects, raising the risk of a slump in output and a potential shortfall in supply. The investment cuts will mean a 3 percent reduction this year in oil and natural gas production, equivalent to 5 million barrels of oil, and another 4 percent, or 6 million barrels, in 2017 – the potential supportive factor for fuel prices.
Chinese oil imports eased slightly in October but remained at elevated levels. China, which vies with the United States for top spot as the biggest crude importer, bought 6.78 million barrels of oil from abroad in October, down 12.9 percent from the previous month and one of the lowest volumes this year on a daily basis.
The country's refined oil product exports jumped 24 percent on a year earlier, as the nation produced more fuel than it could absorb.
All in all, with the U.S. presidential campaign at an end, the fuel markets will refocus again on OPEC: the next major catalyst for fuel indexes. We expect next week bunker prices will continue the present trend of slight irregular fluctuations.
* MGO LS
All prices stated in USD / Mton
All time high Brent = $147.50 (July 11, 2008)
All time high Light crude (WTI) = $147.27 (July 11, 2008)
